Hospital Mergers May Increase Prices

March 5, 2012

The Patient Protection and Affordable Care Act (PPACA) was written with the intention of revolutionizing the health care industry. It would, according to its advocates, lower rates paid by consumers, expand coverage to millions of the uninsured, increase benefits and bend the cost curve of aggregate spending. However, in its implementation, the PPACA will also have the unintended consequence of encouraging hospital mergers, which could counteract some of these goals, says Margot Sanger-Katz of the National Journal.

The merger of three hospitals in Chicago is illustrative of the danger of this occurrence in the health care industry:

Directors of each hospital eventually approved the move with the understanding that by uniting, the hospitals would improve the leverage of their positions and be able to negotiate better rates from insurance providers.

This proved true, as after the first year the three-hospital group saw $24 million in increased revenue -- about a 3 percent lift overall.

This trend continued: Within four years, the group had raised the price of care by as much as 48 percent, according to a government analysis.

The negotiation that takes place between care providers (such as the above-mentioned hospital group) and insurance providers equates to a discussion of the prices consumers will pay. When insurance companies see their prices driven up by powerful, monopolistic health groups, these price hikes are passed onto consumers in the form of higher premiums.

The danger here is that the PPACA is set to ignite these tendencies among hospitals nationwide. Because the Act imposes burdensome regulations that increase administrative expenditures and threaten noncompliance costs, individual doctors and small practices are coerced into mergers.

According to one analysis, the number of hospital mergers and acquisitions has increased by more than 50 percent since the law's passage.

The last big wave of consolidations, in the 1990s, caused market prices nationwide to climb by at least 5 percent, and as much as 40 percent in some markets.

Source: Margot Sanger-Katz, "The New Goliaths," National Journal, February 16, 2012.